Anyone looking to apply for a personal loan should act quickly, as rates could rise notably in the New Year.
Lenders stand to lose a large chunk of their revenue as a result of the Competition Commission’s (CC) proposed crackdown on payment protection insurance (PPI), and they are expected to hike their lending costs to compensate for this.
In case you missed it, the CC wants to ban lenders from selling PPI within 14 days of a customer taking out credit, and is also calling for an outright ban on single premium PPI (where the whole cost of the cover is paid for up front with money that is also borrowed at the same interest rate as the loan). If approved, the proposals could be put in place by early 2009.
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Lenders unhappy, unsurprisingly
PPI is designed to cover payments on a debt – usually mortgages, credit cards or personal loans – should you fall ill, have an accident or become unemployed.
The problem is that many lenders have been aggressively selling their own expensive PPI along with a loan. Some even do so when a customer has no chance of making a successful claim.
PPI has become so profitable (a CC survey found profit margins were around 900%) that many analysts believe banks are actually subsidising their lending rates with the vast profits generated.
Therefore, any crackdown on banks’ ability to sell the insurance will result in higher personal loan rates. The Finance and Leasing Association, which represents a wide variety of lenders who sell PPI, admitted as much in its response to the CC proposals.
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Lock into a cheap loan now
So if you are in the market for a loan, make sure you act fast or you could end up paying far more than you originally intended.
As the table below shows, YourPersonalLoan and MoneyBack Bank are still the most competitive lenders, with a typical APR of 7.8%.
When choosing a loan provider, make sure you compare the total cost of the loan along with the APR. This is because each bank has its own way of calculating interest, meaning a loan with a higher APR could actually work out cheaper.
Take another look at the table: Both Alliance & Leicester (A&L) and the Bank of Scotland have an 8.9% APR, yet A&L is almost £200 cheaper.
As a final point, if you do want to take out PPI on your loan, make sure you don’t simply accept your lender‘s cover. As we mentioned at the start, these generally come with massively inflated premiums, so you’ll be far better off choosing a standalone policy instead.
| | APR | Cost of £10,000, four year loan |
| YourPersonalLoan | 7.8% | £11,613 |
| MoneyBack Bank | 7.8% | £11,621 |
| Alliance & Leicester | 8.9% | £11,852 |
| Bank of Scotland | 8.9% | £12,024 |
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